The Affordable Care Act removed obstacles that prevented some people from buying health insurance — but not everyone has signed up, and not everyone who did sign up kept their coverage. Because of that, millions will owe the individual shared responsibility payment, better known as the Obamacare or ACA penalty, when they file taxes.
Who pays the Obamacare penalty
The ACA’s individual mandate requires everyone in the U.S. to have health insurance, unless they qualify for an exemption. If you didn’t qualify, and went without “essential health benefits” for more than three months in 2015, you’ll have to pay a penalty on your coming tax return.
How much the Obamacare penalty costs
The penalty’s cost is calculated in one of two ways: You’ll either pay a percentage of your total household adjusted gross income — which you’ll figure on your annual tax return — or a flat rate, whichever is greater. Your tax return will also help you determine your penalty amount.
Each year, the penalty will increase to keep pace with inflation and encourage people to buy coverage.
For tax year 2015, the ACA penalty is 2% of your total household adjusted gross income, or $325 per adult and $162.50 per child, to a maximum of $975.
For tax year 2016, the penalty will rise to 2.5% of your total household adjusted gross income, or $695 per adult and $347.50 per child, to a maximum of $2,085.
For tax year 2017 and beyond, the percentage option will remain at 2.5%, but the flat fee will be adjusted for inflation.
How to avoid the Obamacare penalty
The simplest way to avoid the Obamacare penalty is by having insurance. The ACA set up the Health Insurance Marketplace to make this possible. There, you can search for plans and prices, or be directed to your state-specific marketplace that provides the service for your area.
Open enrollment under the ACA — during which you can sign up for coverage for the next year — only lasts for a few months. Outside of open enrollment, you may be able to sign up if you have a qualifying life event, such as a recent marriage, divorce or birth.
You don’t have to get your insurance through the marketplace, though. You can also buy coverage through your employer, a private insurer or through Medicaid, if you qualify.
Some have chosen to opt out of Obamacare, deciding that the penalty is less of a burden than buying insurance; most of them will be fined. But others may be exempt and can stay uninsured or have periods of non-coverage without facing the penalty.
Exemptions from the Obamacare penalty
If you qualify for an exemption under the ACA, you won’t be charged the penalty, even if you don’t have coverage. You could be exempt if:
- The most affordable coverage costs more than 8% of your household income
- You were uninsured for less than three months of the year
- You are exempt from filing a tax return because your income is too low
- You are Native American or eligible for health services through an Indian Health Services provider
- Your religion objects to the use of insurance
- You’re in prison
- You belong to a health care sharing ministry
- You have been abroad for more than one year
- You qualify for a hardship exemption due to an issue such as homelessness, bankruptcy, eviction and similar trying circumstances listed here
If you believe you qualify for an exemption, you can claim it when you file your tax return, or apply on the Healthcare.gov website.
It pays to know whether you’ll be among the millions expected to face the individual mandate penalty when filing tax returns next year. (If you file taxes online, the prepaper you choose will calculate any penalty.) That will help you budget now for penalty costs. And with the next open enrollment period always around the corner, it may be time to reconsider your coverage and potential penalty for the year ahead.
A previous version of this article misstated how the penalty is calculated. It has been corrected here.
This article was updated. It was originally published on Oct. 2, 2014.
Infographic by Elizabeth Renter. Insurance illustration via Shutterstock.